Financial System

 Financial System 

 

Name: Daniel Chavez Martinez 

 

·       Answer the questions.

 

1.     What is Finance?

Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. 

 

2.     What is Financial System?

The financial system is a set of institutions, such as banks, insurance companies, and stock exchanges, that permit the exchange of funds. Financial systems exist on firm, regional, and global levels. Borrowers, lenders, and investors exchange current funds to finance projects, either for consumption or productive investments, and to pursue a return on their financial assets.

 

3.     What are the functions of a financial system?

 

·       It supplies the required financial capital to government for public expenditure on the social welfare activity, infrastructure development, etc.

·       It provides the mechanism to pull the funds in terms of household savings for corporate investments.

·       It facilitates the investors and other market participants to liquidate their investment alternatives like stocks and bonds.

·       It provides a payment system for the exchange of goods and services in the economy.

 

4.     How are the main types of financial institutions categorized ? Describe each one.

 

Regulatory: It is a state or nationally chartered bank, savings and loan association or savings bank, credit union, trust company, or other state or federally chartered lending institution or a regulated affiliate or regulated subsidiary of any of these entities.

 

Intermediaries: It is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers).

 

Non-intermediaries: These include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops. These non-intermediaries financial institutions provide services that are not necessarily suited to banks, serve as competition to banks, and specialize in sectors or groups.

 

 

 

5.     Which are the main classes of financial instruments issued in a financial system? Describe them in detail.

 

Financial instruments may be divided into two types: cash instruments and derivative instruments.

 

Cash Instruments: The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable. Cash instruments may also be deposits and loans agreed upon by borrowers and lenders.

 

Derivative Instruments : The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.An equity options contract, for example, is a derivative because it derives its value from the underlying stock.

 

 

6.     What are the distinctions between various types of financial markets according to their function? Explain them.

 

Money and Capital Markets

o   While the money markets deal in the short-term claims, the capital markets does so in the long-term claims.

o   This convencional distinction is based on the differences in the period of maturity of financial assets issued in these markets.

 

               Primary and Secondary Markets 

o   Primary markets deal in the new financial claims or new securities.

o   Secondary markets deal in securities already issued or existing to outstanding.

 

7.     What does the “flow of funds” refer to? Explain in detail.

 

Flow of funds (FOF) are financial accounts that are used to track the net inflows and outflows of money to and from various sectors of a national economy. Macroeconomic data from flow of funds accounts are collected and analyzed by a country's central bank. In the United States, this data is released by the Federal Reserve Bank approximately 10 weeks after the end of each quarter.